Seb Jones
Business Change Director, Muller Dairy Ltd.
Trade promotions - how low can you go?
17 May 2011
Consumer Products, ERP, Retail & Trade, Trade Promotions Management, Consumer Business
How low can you go? I ask this question not about your moral standards or indeed about your limbo dancing ability, but about the depth of retailer trade promotions!
When you last did your regular shop, did you see "better than half price" deals, or have you seen them advertised on TV? "Buy one get 2 free" deals have started to appear and on the biggest of brands too - I calculate that as a 67% discount! When I see this, two things immediately spring to mind:
- If they can make money at this price, they weren't half making a killing before!
- When and where is it going to end? They'll be paying us to take the stuff away soon.
Can it continue?
When I turn to the marketing press for answers or insight, I'm told this level of discounting is damaging brands (I believe this), is totally unsustainable (I believe this too) and that we should brace ourselves for more of the same! (Bizarrely I believe this one too).
In my simple world, I see the major retailers with market share that has been relatively flat for a while, with an offering that is increasingly homogenous and whose only source of competitive advantage is now price. They no longer compete to be different, they compete to be cheaper. Mix this with an environment of shrinking consumer disposable incomes and the British love for a bargain, and it's not really surprising that promotion intensity in terms of frequency and depth is increasing.
Who pays the price?
So what about the 'poor' consumer goods companies who are predominantly the ones footing the bill? If it's bad for brands and unsustainable, why are they behaving this way? Well, seems to me it's all about growth. Are any brands planning to contract this year? I doubt it. As consumers stop consuming, the pressure to promote to drive sales and grow market share rises inexorably. It must only be a matter of time before profits suffer, even with the most successful cost and efficiency drives.
Now that commodity prices are on the rise again, the issue of pricing and discounting must be the top challenge facing consumer goods companies. Does that make it the top challenge facing their CIO's and software vendors?
Things used to be simple
As I remember it, there was a time when the purpose of a promotion was to entice consumers to buy a product when it was cheap on deal, in the hope that once they tried it they'd be back every week to buy it at full price.
Success was a higher level of base sales after the promotional spike than the level before. The cost was a simple calculation based on base volumes and prices compared with the discounts and volume uplifts. Pretty straightforward stuff even for an ERP vendor!
What's the point?
These days, I'm not sure if promotions have any deeper purpose other than to drive short-term sales and volume market share. I recently read an evaluation of one promotion that read...
Conclusion: promotion did not meet its intended objectives.
Future Recommendation: change the objectives.
I got a sense of some frustration from this only half tongue in cheek statement.
I wouldn't have thought that many promotions deliver a subsequent base sales increase these days. Either because our cupboards are so crammed full with the stuff we don't come back for weeks to buy any more or if we do want some more we restrain ourselves, sure in the knowledge it will be back on deal soon enough. So the objectives seem to have shifted towards driving volume at (presumably) incremental profitability.
To work this out means that we need a calculator, ideally packaged up and sold as a trade promotion evaluation system. Of course, we know our prices and discounts, but what about our base volume, do we even have one anymore? But the biggest shift seems to be that with increasing depth of deal and with the cash strapped, bargain loving, promiscuous promotional junkies out there the cannibalisation impact is huge. We steal our own future sales (when we're not on deal), we steal from our other brands, from our competitor brands (good for us but maybe not the retailer), from other retailers (good for retailer but maybe not for us), we even steal from other categories (after all, there's only so much food we can eat, or so many times a day we can clean ourselves, our houses and our clothes). Who can assess the impact of all of these on the profitability of the promotion for the manufacturer and the retailer?
Who knows the answer?
Well, apparently, there are companies out there analysing thousands of historical trade promotions every month, who can give me the answers to these questions (displayed as whizzo charts and presented as insights). This always struck me as like saying "I've managed to correlate exactly our sales volume with the weather - now all I've got to do is forecast the weather!"
But then again, perhaps they do have something. If it's all too complex, rather than invest all our efforts into building expensive systems that try to calculate the impact of multiple variables (all of which we estimate) to pre-evaluate and optimise our promotions, let's shift the focus to the post-evaluation. If we have simpler rules for deciding whether a promotion actually worked for us or not, then when we know the actual impacts, perhaps we should simply do more of what worked and less of what didn't!
Just a thought…what do you think?
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Seb joined Unilever as a Maths graduate and after just a couple of years decided that IT must be more exciting than Accounting. He then held various IT roles from programming onwards, working on the usual array of ERP implementations, open systems, 4GL's etc, before joining Müller in 1996 after obtaining an MBA from the Open University.
Since then, he has led the IT teams in the UK and for the Müller Group based in Germany in getting to grips with the joys of SAP and rolling it out into the European sites.
For the last 2 years Seb has worked outside of IT in a strategy and change management role, but still has a view!
Disclaimer: The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of Bluefin Solutions Ltd.
Comments
Praveen Srivatsa 04 Aug 2011
1. Price discounts have become a proxy for "cost of doing business" and it will do a lot of good for CPG companies to go for EDLP and spend trade dollars on building relationship with consumers
2. Whether it is based on scan or sell in, trade is increasingly looking at discounts as another revenue generator rather than a value generator
Seb Jones 02 Jun 2011
Hi Michael, I think there is certainly a moral/ethical dimension to trade promotions which I can only see increasing due to economics, waste and over-consumption.
At the moment, promotions are still tending to drive 'weight of purchase' and I don't think we're yet seeing real changes in retail behaviour.
One retailer did, I recall, offer a 'buy one get one free later' deal which was championed as reducing food waste. I suspect this would suit the retailer ( as consumers would be drawn back to their store for their free one later ) but not the manufacturers who would simply sell their normal volume at on average half the price.
I think things really will have to change in this area over the next few years.
Michael Eldridge 31 May 2011
Seb, with the media and the government becoming more vocal about food waste is there a moral dimension to trade promotions on short shelf life products?
Are you seeing any change in behaviour on the part of the supermarkets and the FMCG orgainsations to design promotions in new ways that don't encourage the waste associated with BOGOF and the like?
Seb Jones 18 May 2011
Hi Jim, I agree. Cannibalisation has a big impact on profitability of the deal. We can show them the financial impact of cannibalisation, but can they predict it accurately? Clearly you need some financial pre-evaluation to justify and approve the promotion but indeed try to keep this simple. Focus on the post-eval where more of the factors are known and see what mechanics worked on which products with which customers and then run them again.
Seb Jones 18 May 2011
Hi Mark, appreciate your perspective especially on loyalty and we have recently run on-pack offers to drive this. Problem is manufacturers don't determine ultimate selling prices, the retailers do. Our uplifts on bogof are way more than double, which will certainly increase value sales, but not profits as this depends on the relative margin when on and off deal - hence the need for a calculator.
Jim Cook 17 May 2011
Really interesting. We've grappled elsewhere with cannabilisation and i think you're coming to the same conclusion that it's really not worth it and too hard to either understand or control. It's one of those things that everyone wants in the system but those at the sharp end (the account managers) can't predict the impact.
So the message I take from this is keep the pre-eval simple but focus more time on how to collect and update post evaluation. Maybe we don't focus enough on the analysis and then use the results within a planning context to extend, repeat etc.
Mark Chalfen 17 May 2011
Interesting viewpoints.
When you do a BOGOF do you see your sales volume more than double? If you do then great the promotion has been a success, however if sales are static compared to when the price was the RRP all you have done is reduced your revenue whilst your costs have been consistent. In fact I would presume that your production forecasts are linked to your Trade promotions, so when there is a BOGOF you produce more stock assuming that it will be sold.
The famous producer of sofas who always have a 1/2 price sale cant benefit from promotions, the promotion price is really their standard price - most people are aware of that.
The idea of coupons and vouchers could lead to brand loyality and that could be more effective than slashing your prices in public to attract one time buyers.
Perception could be, if you can charge 75p for a product one week, why should I be paying £1.50 a week later. However if the price was £1.50 and I received a coupon once a month that gave me £1.00 off I would continue buying the product. I would also be inclined that week to buy more than my normal quantity as I "got a bargin".
The key to this are well thought out plans that offer consumers something different in my opinion.
There are some consumers that still by products, because they like the product and will continue buying the same product week in and week out.